Retention is standard practice — but the financing cost of that locked capital is real, negotiable, and almost never tracked separately from the rest of accounts receivable.
Retention money — the 5-10% of each bill a client withholds until the defects liability period ends — is standard practice across Indian construction contracts. It is also capital that is unavailable to the contractor for months, sometimes years, and its cost rarely gets calculated the way a loan's interest would be.
Retention is typically accepted as a standard clause at contract signing, without pushback — and many contracts don't even mention the option of substituting a bank guarantee for cash retention, an option that, where available, frees up the cash immediately in exchange for a guarantee fee usually far cheaper than the opportunity cost of the locked capital.
₹9.6 lakh held for 14 months at a contractor's typical 14% cost of working capital carries over ₹1.25 lakh in pure financing cost — money the project accounts never show as an expense, because retention sits in "accounts receivable," not "cost of capital."
Once retention is treated as "money owed" rather than "capital financing the client interest-free," the incentive to negotiate better terms — and to chase overdue releases the moment the defects liability period ends — becomes obvious.
Contractors who manage retention well negotiate its terms at contract stage, not after signing — capping the rate where the client's standard terms allow room, offering a bank guarantee in lieu of cash retention wherever the client's process permits it, and pinning the release date explicitly to the defects liability period rather than waiting for the client to release it proactively. The underlying shift is treating retention as a financing decision with a real, calculable cost — not as an ordinary receivable that will simply arrive eventually.